From the Magazine

The Bank Job

One of the biggest disconnects on Wall Street today is between the way Goldman Sachs sees itself (they’re the smartest) and the way everyone else sees Goldman (they’re the smartest, greediest, and most dangerous). Questioning C.E.O. Lloyd Blankfein, C.O.O. Gary Cohn, and C.F.O. David Viniar, among others, the author explores how their firm navigated the collapse of September 2008, why it has already set aside $16.7 billion for compensation this year, and which lines it’s accused of crossing.

Goldman Sachs C.E.O. Lloyd Blankfein and C.O.O. Gary Cohn, in the boardroom of Goldman’s headquarters, in New York City. Cohn “was always Lloyd’s guy. I mean, always,” says a former Goldman trader. Photograph by Annie Leibovitz.

Lloyd Blankfein—who was born poor in the South Bronx, put himself through Harvard, and became the C.E.O. of Goldman Sachs in 2006, after 24 years at the firm—is a history buff, a lawyer, a wordsmith, and something of an armchair philosopher. On a Thursday in October—the very day when the firm announced it had made $8.4 billion in profits so far this year—he speculates whether Goldman would have survived the financial conflagration in the fall of 2008 entirely on its own, without any kind of help, implicit or explicit, from the government. “I thought we would, but it was a hell of a higher risk than I was happy with,” he says, sitting in his 30th-floor office in Goldman’s old headquarters, at 85 Broad Street, in Lower Manhattan. “As a result of actions taken [by the government], we were better off than we otherwise would have been. Was it dispositive? I don’t know. I don’t think so … but I don’t know.”

He adds, “If you ask, in my heart of hearts, do I think we would have failed . . . ” He pauses, then pulls out his trump card: at the height of the crisis, Warren Buffett agreed to invest $5 billion in Goldman Sachs.

Buffett, the venerated Nebraska investor, is famously reluctant to put money into Wall Street firms. But he has a long history with Goldman. As a 10-year-old he went to New York with his father, a broker in Omaha, and they stopped by Goldman Sachs to visit Sidney Weinberg. As Goldman’s leader from 1930 to 1969, Weinberg helped build the firm into the powerhouse it became. “For 45 minutes, Weinberg talked to me as if I were a grown-up,” Buffett likes to recall. “And on the way out he asked me, ‘What stock do you like, Warren?’” In later years Buffett liked to cite Byron Trott, who until recently worked in Goldman’s Chicago office, as one of the few investment bankers worth his salt.

And so, when Trott asked Buffett if he would be interested in investing in Goldman during the frenetic days after Lehman Brothers’ bankruptcy, Buffett thought about it, and on Tuesday, September 23, he and Trott hammered out a deal. In a very brief—and very Buffett—call that afternoon with Blankfein, Trott, and then co-president Jon Winkelried, Buffett said he would invest $5 billion in exchange for a hefty 10 percent dividend and rights to buy additional stock over the next five years at a price of $115 a share. “I’m taking my grandkids out to Dairy Queen,” he told the Goldman men. “Call me and let me know what you want to do.”

Goldman accepted Buffett’s tough terms, and thanks to the investment was able to raise another $5.75 billion, by selling stock to other investors. Blankfein says the firm could have raised multiples of that but didn’t need more money. And Buffett has said that while no one could ever understand the balance sheet of any Wall Street firm, he has confidence that Blankfein is both very smart and very conservative. But there was another reason he invested: “If I didn’t think the government was going to act, I would not be doing anything this week,” he explained to CNBC’s Becky Quick. “I might be trying to undo things this week.”

Blankfein refers to this period as “the fog of war,” and yet at 85 Broad Street a clear story line has emerged from almost every level of the firm: it was Goldman’s much-celebrated culture and its superior ability to manage risk, not the helping hand of the government, that got it through the events of fall 2008. When I ask Gary Cohn, Goldman’s chief operating officer, and David Viniar, the firm’s chief financial officer, if, barring a financial Armageddon, Goldman would have survived without all the various forms of government intervention, Viniar says, “Yes!” almost before I can finish the question. “I think we would not have failed,” says Cohn. “We had cash.”

It’s hard to find anyone outside the firm who doesn’t see this as revisionist history. Combine that with further proof of Goldman’s worldview—namely, the huge amount of money its people will earn this year ($16.7 billion has already been set aside for compensation, which could translate into an average of $700,000 per Goldman employee)—and you get rage. Widespread rage. “Complete crap,” says a senior financier, about Goldman not needing the government’s help. “It is a bunch of bullshit,” says a former Goldman Sachs managing director. Even Neel Kashkari, a former Goldman banker, who became an assistant secretary of the Treasury last summer, told The New York Times that “every single Wall Street firm, despite their protest today, every single one benefited from our actions. And when they get up there and say, ‘Well, we didn’t need it,’ that’s bull.”

Factor in Goldman’s political connections—two of the firm’s past four leaders have served as Treasury secretaries, while another source tells me about a G-7 meeting where he counted 24 to 28 out of 32 finance officials in attendance as ex-Goldman men—and you get conspiracy theories on steroids. “THIS FIRM IS PURE EVIL” is a typical comment whenever a story about Goldman is posted on the Internet, which is almost every day now.

Goldman gets that it has a problem; people there are deeply bothered by the outcry. “There is an embattled feeling around the place,” says someone who knows the firm well. This is magnified, perhaps, because there has always been a whiff of sanctimony about the firm. It not only wants to make money; it wants to be seen as a force for good. Blankfein’s now infamous comment to a reporter at the London Sunday Times that he was doing “God’s work” was meant as a joke, but there was a ring of unintentional truth to it.

Goldman executives believe they have a public-relations problem, not a substantive one. When the firm had TARP money, there was a ban on using the corporate box at Yankee Stadium, and last fall Blankfein went on a charm offensive that showcased his humble roots to the press.

What Goldman doesn’t get is that all the murk about the ways it has benefited from public money taps into a deep fear that has long existed among those who think they know Goldman all too well. It’s a fear that, as one person puts it, Goldman’s “skill set” is “walking between the raindrops over and over again and getting away with it.” It is a fear that Goldman has the game rigged, even if no one can ever prove how, not just because of its political connections but also because of its immense size and power. And it is a belief that despite all the happy talk about clients and culture (and, boy, is there a lot of that) the Goldman of today cares about one thing and one thing only: making money for itself. Says one high-level Wall Street executive, “Why do you have a business? Because you have a customer. You have to make an appropriate profit. But is it possible that Goldman has changed from a firm that had customers to a company that is just smart as shit and makes a shitload of money?”

Senior partner Sidney Weinberg in 1957.

A Storied Firm

Founded in 1869, Goldman Sachs, in the early days, was a scrappy, Jewish firm in a world of white-shoe investment banks (such as J. P. Morgan), which controlled all the valuable corporate clients. In 1929, Goldman was almost brought down by a charming manager-partner named Waddill Catchings, who created what was known as the Goldman Sachs Trading Corporation—a story told in detail in The Partnership, by Charles Ellis. It was essentially a trust which used debt to buy other companies, which used more debt to buy still more companies—in other words, a ticking time bomb of debt, in much the same way that modern trusts designed to buy mortgages became ticking time bombs of debt. When the inevitable collapse came, the result tarnished Goldman for decades.

The firm’s recovery was in large part due to Sidney Weinberg, who famously joined Goldman as a janitor in 1907. While Weinberg built the firm’s banking business, Gus Levy, a Tulane University dropout, developed a formidable sideline trading stocks and bonds. In 1969 he took over Weinberg’s job at the head of Goldman. When he died, from a stroke in 1976, Weinberg’s son John and John Whitehead, an Illinois-born, Harvard-educated World War II veteran, continued to transform Goldman into a major player in investment banking. For much of Goldman’s history, the two worlds—the genteel, plush-carpeted one of banking and the rough-and-tumble one of trading—existed in a kind of balance.

As the firm grew, it developed a unique culture, characterized by impossibly hard work, loyalty, secrecy, and a lack of flashiness. Senior executives there—unlike those at other firms—do not have palatial offices with private bathrooms. In the late 1970s, Whitehead put what are still Goldman’s 14 Business Principles on paper. The first: “Our clients’ interests always come first.”

At one time, outsiders could see this principle in action. In the era of hostile takeovers, Goldman wouldn’t do them, and the firm was the last on Wall Street to start a business managing money for wealthy individuals, because it didn’t think it should compete with the big money-management firms, which were also clients of its trading operation.

By the early 1990s, Morgan Stanley and Goldman Sachs sat atop the pinnacle of Wall Street. But even then Goldman had a mystique that Morgan lacked.

Insiders and outsiders alike have long struggled to define Goldman Sachs’s secret sauce. It’s a blend of impossibly hard work, intense competitiveness, and something that closely approximates teamwork, although that makes the culture sound more touchy-feely than it really is. “The firm is hard-knuckled and sharp-elbowed, but that’s hidden in the velvet glove of teamwork and collegiality,” a former managing director tells me.

The place does not ooze the smug satisfaction that often comes with great wealth. Rather, it oozes anxiety. I worked there as an analyst for three years in the early 90s, and I remember that most people couldn’t take advantage of the long line of black cars that waited until midnight outside 85 Broad Street to take them home. Instead, they had to call for cars, because they never got out early enough. I also recall being told that having a tan in the summer was a bad sign, because it meant that you weren’t working hard enough. You’ll often hear Goldman people speak of “quartilers,” because Goldman divides its people into groups based on performance. The usage would be, “You don’t send a second quartiler to build a business.”

But, of course, not only the demands but the rewards—in terms of both prestige and money—are bigger.

The Meek Shall Not Inherit the Firm

In the early 1990s, Goldman faced one of the biggest tests in its history. After big trading losses, a result of a bet on bonds gone bad in London, partners began quitting, and yanking their capital from the firm. It was “very shaky,” recalls a former partner. “Those of us who made partner in 1994 actually had to pay [money into the partnership to make up for the losses]. The smart guys were all leaving.”

Into that leaderhip vacuum stepped Jon Corzine, a fixed-income trader and a fierce believer that Goldman should be public. Whereas Morgan Stanley had sold shares to the public in 1986, Goldman was Wall Street’s last private partnership. In December of that year it began to seriously debate the idea of going public, according to The Partnership, but several questions seemed always to stop it: What would happen to the culture if the firm went public? And how would you divvy up the money in a fair way, among new partners, longtime partners, and former partners?

“The group running Goldman now is not a very diverse group, and that
is potentially very damaging,” says one former partner.

By 1998, however, Corzine had persuaded the rest of the firm. But before the I.P.O. could get off the ground, the $4.6 billion hedge fund Long Term Capital Management melted down, causing a crisis on Wall Street. L.T.C.M.’s massive bets were financed with an inordinate amount of debt, and as the trades went bad, all of Wall Street, which had lent money to L.T.C.M. and often copied its trades, reeled. Like those at other firms, Goldman’s fixed-income trading operation, which was Corzine’s home, faced huge losses. Corzine had already provoked great resentment by calling himself C.E.O. and acting unilaterally, even though Goldman had always been run by its all-powerful executive committee. And so, the committee of, at that time, five men staged a coup and forced Corzine out. They replaced him with Henry Paulson, an Illinois native who made his career at the firm by winning investment-banking business. (Ironically for Corzine, Goldman finally did sell shares to the public, at $53 apiece, in the spring of 1999, which meant that, just as with other publicly traded Wall Street firms, Goldman was no longer playing with partners’ capital, but with shareholders’ money.)

Paulson is a walking set of contradictions. A fiercely competitive man, he is also an avid conservationist who freaked out when birds would fly into the glass windows of 85 Broad. He is a committed Christian Scientist, whose main talent both at Goldman and in government was a brutal pragmatism. “Hank gets shit done,” as one person tells me. And although Paulson’s intimidating presence and gravelly voice are now well known to millions of Americans, less visible is a strangely endearing quality. Most people who know him think that he always tells the truth, mainly because he isn’t capable of the verbal slickness that is critical to dissembling. “He didn’t want the crown, but he wore it well” was the word among some partners regarding Paulson’s tenure as C.E.O., from 1999 to 2006.

Brave New World

The rise of Lloyd Blankfein, who took over as C.E.O. in 2006, is in part a testament to the inexorable creep of the power of money at Goldman Sachs. During the early years of Paulson’s reign, the heirs apparent were his co–chief operating officers, John Thain and John Thornton. Thornton was a classic Goldman Sachs banker, a creative thinker who was great with clients. But his critics say that he had some weaknesses, including a dislike for the grungy details of management. In the end, Paulson, in a 2003 meeting in his office, told him he would not become C.E.O. Someone close to Thornton, though, says that he had already been making plans to leave after he realized Paulson, who initially planned to serve as C.E.O. for only a few years, wasn’t going anywhere. And there was something else. Thornton was also discomfited by what he felt was a change at Goldman: a newfound obsession with making money first and foremost. He believed great institutions had to stand for something more.

Thain, on the other hand, was the “good son,” as one Goldman executive puts it. A former head of Goldman’s mortgage business who became the firm’s chief financial officer in 1994, he knew every detail of how Goldman Sachs ran. He, too, had to rethink his future when Paulson decided to stay. And some say his power base began to erode as Goldman’s new breed of traders made more and more money. A former managing director tells me that if the old Goldman made its money taking Ford public the new Goldman made its money hedging the cost of platinum for Ford. And that business was run not by John Thain but by Lloyd Blankfein. In 2003, Paulson decided to appoint Thain and Blankfein as co–chief operating officers, but Thain saw the handwriting on the wall. The New York Stock Exchange began recruiting him to be its C.E.O., and later that year he took the job.

From left: Henry Paulson, Stephen Friedman, and Jon Corzine, 1994; all would rise to the top post at Goldman.

One of the most surprising things about Blankfein, 55, is how likable he is. Bald and on the short side, he is self-deprecating and has a wicked sense of humor and a fondness for bad puns. He came to Goldman via J. Aron, a tough, street-savvy, highly entrepreneurial commodities-trading shop, which Goldman acquired in 1981. “I was invisible for the first 24 of my 27 years here,” Blankfein tells me. “It’s not like I sought this out.” But this humble explanation masks another side of Blankfein. One does not amble one’s way to the top of Goldman Sachs.

Internally, Blankfein is viewed as extremely “commercial,” which means, in Goldman parlance, having a talent for making money. “Blankfein is Paulson on steroids,” says one client, referring to Blankfein’s competitiveness, even though he rarely engages in a show of brute force. “If [former Lehman C.E.O.] Dick Fuld is a machete, then Lloyd Blankfein is a Swiss Army knife” is how Anthony Scaramucci, a former Goldman vice president, who now runs SkyBridge Capital, explains Blankfein to me.

Over the years one criticism of Blankfein that has stuck is that he is not comfortable with people who aren’t his guys. Those “guys” are usually traders. “The group running Goldman now is not a very diverse group, and that is potentially very damaging to the franchise,” says a former partner. Chief operating officer Cohn grew up at J. Aron, and if Blankfein’s more ruthless side is masked by humor, Cohn’s knuckles are usually on full display. “Cohn is a lot like Fuld,” another former Goldman partner says. “He is a tough, aggressive trader.” Says a former trader, “Gary was always Lloyd’s guy. I mean, always.”

Under the new leadership the culture of the firm seems to be changing. Once upon a time in the not-so-distant past, even a Goldmanite wouldn’t have sniffed at a million dollars a year. But in recent years, the numbers have become multiples of that. (Of course, this is true across Wall Street, but particularly at Goldman.) In 2007, Blankfein made $68.5 million, the most ever for a Wall Street C.E.O. Cohn made $67.5 million. Fair or not, there’s a sense that the numbers matter because the new Goldman cares about keeping up with the hedge-fund guys. “Everyone loves to hate Goldman Sachs, and Goldman loves to hate the hedge-fund community,” says one trader. “They’ve gotten rich, but they haven’t gotten rich like Louis or Julian or George” (legendary hedge-fund managers Louis Bacon, Julian Robertson, and George Soros).

Under Blankfein, Goldman continued to grow exponentially: by 2007 the firm’s revenues were $46 billion, nearly three times that of 2000. In large part, this was the result of a strategy, begun under Paulson but embraced by Blankfein, in which Goldman no longer sat on the sidelines, dispensing advice, but rather invested its own money alongside its clients’. Goldman now has a money-management business; a large private-equity business, meaning that while big buyout funds are Goldman’s clients they are also its competitors; and a proprietary trading business, which exists specifically to trade Goldman’s capital on Goldman’s behalf—so hedge-fund clients are also competitors. Across Goldman’s many trading businesses, the line is fuzzy as to when the firm is acting for itself and when it is acting on behalf of clients.

Inside “the Black Box”

Despite the public financial statements Goldman files every quarter, no outsider can tell how the firm really makes its money. You cannot see into “the black box” of the trading empire. Blankfein says that only about 10 percent of Goldman’s profits come from purely proprietary trades, but there is no way any outsider can confirm that independently. And, anyway, what’s in the black box is always changing, so the numbers are relevant only in the current moment. “Goldman changes the doughnut machine all the time,” says independent analyst Meredith Whitney. “It’s never the same doughnut. Around the rest of the Street, it’s always the same doughnut,” by which she means that Goldman constantly adjusts its investment strategies, as opposed to other banks, which tend to be less responsive to the market. Blankfein uses the word “nimble” to describe Goldman, and it indisputably is.

A side effect is that, in a firm where producing profits helps you rise, banking has now become an adjunct of the trading business, where the real money is made. Steve Scherr, a 17-year Goldman veteran who helps run the investment-banking business, claims that he does not feel marginalized. “The way banking is thought about within the firm has changed,” he says. “Banking has taken on increasing presence as the sales force of the firm.” In other words, when Goldman advises a company that wants to sell itself, the Goldman banker who wins that deal may also be able to bring Goldman in as an investor, or bring Goldman traders in to sell the company a hedge against a deterioration in a foreign currency, and on, and on.

But not everyone sees this in such a sunny way. A former partner explains to me that investment banks have always had conflicts of interest. In his view, those conflicts have taken on a darker tone. For example, a few years ago, Goldman’s bankers were told that they should help sell more derivatives. “Say you have a client with a foreign-exchange problem. So you bring Goldman’s foreign-exchange expert in, and he gives you a price. I’m giving the client Goldman’s pricing, not necessarily the best pricing, because there’s a desk at Goldman that’s making money on it.”

This gets to the heart of the complaints about Goldman by others on Wall Street, which are often quite bitter. When Blankfein speaks of being “so close to clients that you can see the pattern better than anyone else,” some worry that this means his firm is using client information in ways that aren’t necessarily in the clients’ best interests (though few in the business think Goldman would cross the line into illegality). In Street parlance, a “counterparty”—i.e., the person on the other side of a trade, as opposed to one you are representing—is like a consenting adult, and hence the line you’ll frequently hear: The new Goldman Sachs doesn’t have clients—it has counterparties.

These questions are particularly pronounced among hedge funds. “People worry that they’re in my business, and they’re better than I am,” says one money manager. Asks another hedge-fund trader, “Are they the Yankees? No, the Yankees actually lose! Goldman never loses. And people say they are a hedge fund! This ain’t no hedge fund. Hedge funds lose money.” When I ask him if he does business with Goldman, however, he replies, “Of course we do business with them. We have to. It’s like the Mob who picks up the garbage. You pay their fees, because you need your garbage picked up.”

Trimming the Hedges

All of this explains why Wall Street loved the battle between hedge-fund manager Jim Chanos and Goldman Sachs executive Marc Spilker, co-head of the asset-management division. The two are neighbors in the Hamptons and had a dispute over widening a path that leads to the beach. While the matter was still being litigated, Spilker hired a work crew to knock out hedges on Chanos’s property. Chanos, who says he paid Goldman between $40 million and $50 million in fees annually, tried to complain to Blankfein. One of his lieutenants told Chanos that the C.E.O. wouldn’t listen to his complaints over the issue, and furthermore Goldman didn’t like the way he, Chanos, was handling this. Chanos saw it as a tangible sign that, at the new Goldman, clients no longer mattered. He pulled all his business within two weeks.

To any concerns about how Goldman treats its clients Blankfein has a simple response, which is that Goldman’s market share is still No. 1. And while some say they do business with Goldman because the firm’s omnipresence means they have to, there is another reason, which even its most bitter critics concede: Goldman is better. Why is that?, I ask a hedge-fund manager who has just finished his own heated explanation about how he doesn’t trust Goldman. “I can’t really tell you why it’s better. It’s just better,” he says. “It’s six p.m. in New York City, and Goldman will figure out how to get the right person in Hong Kong—a guy we’ve never spoken to—on the phone to walk us through exactly what we want to know. He’ll be fully knowledgeable.” He laughs. “Try the same thing with Citi. They can’t even figure out what they know, let alone how to take advantage of it.”

The Mortgage Mess

In a weird way, what happened at the start of the subprime crisis confirmed to people at Goldman Sachs what they fundamentally believed about themselves—that they really are better than everybody else on Wall Street. But, for many on the outside, it offered proof instead that Goldman put protecting its own interests ahead of protecting the interests of clients.

In December 2006, about a year before any other Wall Street firm started realizing the magnitude of the crisis, Goldman began betting against the mortgage market. By August 2007—which was right after Chuck Prince, then Citigroup’s C.E.O., famously said, “As long as the music is playing, you’ve got to get up and dance”—Goldman Sachs was leaving the dance floor. The firm had also begun to sell off tens of billions of dollars’ worth of the big loans on its books that had been used to finance leveraged-buyout deals. “In retrospect, there is not a person who wouldn’t have sold where we were selling,” says Steve Scherr. How true!

Goldman simply saw what everyone else could have—and should have—seen: the prices of the securities backed by mortgages, and then of the big loans, were declining. Each and every day, Goldman rigorously books profits and losses based on where it can sell its positions. Because those values were declining, Goldman was taking losses in its mortgage business day in and day out. This made the mortgage traders nervous. Says David Lehman, a managing director in Goldman’s mortgage-trading group, “Whether the trade is subprime mortgages or bananas, if it’s not going your way, you have to get smaller.”

A 1929 Goldman stock certificate.

Except that most of Goldman’s competitors did no such thing. At other firms the mortgage traders tried to protect their fiefdoms, arguing that declines were temporary. They held or even grew their positions—and refused to admit they were losing money. Doubts and warnings seldom made it to top executives, and even when they did, they were ignored in the desire to keep the good times rolling. “There’s people’s hopes and prayers, and then there’s the reality of the market. You can’t confuse the two,” says Cohn today.

Goldman didn’t just sell the mortgage securities and stop doing business, however. After a now famous meeting in David Viniar’s office on December 14, 2006, Goldman’s traders began to protect the firm against further declines in the market. Just as you can short the S&P 500, the traders took short positions in an index that tracked the price of mortgage-backed securities. They also either sold assets they owned to others at losses or dramatically marked down the price on their own books.

In the aftermath of the crisis, criticism erupted that Goldman had continued to sell mortgage-backed securities to its clients while betting against those very securities for its own account. Clearly, in the simplest terms possible, this is true: while Goldman was never the biggest underwriter of C.D.O.’s (collateralized debt obligations—Wall Street’s vehicle of choice for mortgage-backed securities), the firm did remain in the top five until the summer of 2007, when the market crashed to a halt.

Goldman argues that the buyers of their C.D.O.’s were themselves sophisticated investors who were capable of making their own decisions. In other words, they were counterparties. “You don’t shut your franchise down just because you have a view of a market,” says Cohn. “When we do an I.P.O., people don’t ask us our view of the stock market.” But a less generous interpretation was given in a recent McClatchy Newspapers series, which quotes an analyst report that describes Goldman as being “solely interested in pushing its dirty inventory onto unsuspecting and obviously gullible investors.” (A Goldman spokesperson says, “The statement is not true. The McClatchy series was characterized by unsubstantiated claims, innuendo, and outright falsehoods.” McClatchy, however, stands by its work.) And so, if the old Goldman was defined by its refusal to do hostile takeovers, the new Goldman is defined by its skill at protecting its own interests.

With the benefit of hindsight, there is another aspect of the story that may ultimately prove to be more troubling, and Goldman has disclosed that it, along with other financial institutions, has received requests for information from “various governmental agencies” relating to “subprime mortgages, and securitizations, collateralized debt obligations and synthetic products related to subprime mortgages.”

One new invention the Street created was something called a synthetic C.D.O., which was sort of like making a coin: you have to have two sides, heads and tails, long and short. In effect, the person who has tails, or is short, makes small payments to the person with heads as long as the securities that make up the C.D.O. are performing. If they blow up, then a big payment goes the other way.

Investors in a C.D.O. can choose to buy a range of securities, from what are supposedly the safest all the way down to the riskiest, or equity, position. The person who owns the equity stands to make the most for taking the greatest risk, but only after everyone else gets paid. So if you owned the less risky slices, you might feel good if the equity owner were a smart guy who only stood to get paid after you did.

Except that might not be the way it worked, because the equity owner could also be the person who had the tails, or short, position. As several sources have described it to me, the numbers could work so that the equity investor would do decently if the security performed—but make a fortune if it went bad.

The equity owner could also play a role in selecting the mortgages on which that C.D.O. was based. So theoretically at least—and some suspect this is not just theoretical—the equity owner could choose securities that he thought had a good chance of going to hell. As one person says, this is akin to “betting that your own house is going to burn down” after you build it with highly flammable materials.

There are many permutations of this trade. Some people believe that Goldman engaged in versions of it, and that it facilitated them for hedge funds. Goldman defends this. “We own equity, we buy a credit- default swap, and we are hedging ourselves,” says Cohn. As for selecting the collateral, he says, “It’s no different. Our clients are smart, sophisticated institutions. They should know that’s the case.”

He has a point. As long as no one explicitly misrepresented where their interests lay—and there is no evidence of that—supposedly sophisticated investors have a duty to understand what they’re buying, not to base their decision on what the “smart guy” is doing.

And if the mortgage market hadn’t collapsed—and there’s no way anyone could have known for sure that it would—then these deals wouldn’t have been so profitable, and no one would care. But when I ask one knowledgeable person about what happened to some of the deals that Goldman is rumored to have done, he responds with one word: “Torched.” Or as another person says about the bigger picture of the crisis, “Goldman’s management team was almost flawless in its execution. But how many people needed government help because of the things Goldman sold them?”

Trade with the Taxpayer

As a lot of people know now, Wall Street firms are fragile entities, needing the market to finance themselves. Because it is cheaper for them to borrow short-term money than to borrow long-term money, during the bubble years they all, to some degree, began to rely on short-term money—which they’d use to buy assets such as real estate or entire companies that couldn’t be sold immediately. It’s as if you bought a house and the bank at any time had the right to demand payment in full—tomorrow. Goldman managed its balance sheet more conservatively than many of its peers, and it grew more conservative after Bear Stearns’s overnight lenders pulled the plug in March 2008. By the time the crisis hit 85 Broad Street, six months later, Goldman had $114 billion in cash, and very little funding that needed to be paid off in less than 100 days.

This is a big part of why Goldman’s treasurer, 40-year-old Liz Beshel, says that “rumors of our death were greatly exaggerated.” She adds that the demands for cash never grew larger than what Goldman had planned for. Overall, the firm conveys an attitude of dispassion about the whole affair. When I ask Gary Cohn if he was worried about Goldman’s stock price, which plunged from $207.78 in February 2008 to $47.41 in November, he says, “It wasn’t scary at all.”

“Complete and utter nonsense,” says someone who knows Cohn well. Indeed, a falling stock price can become a self-fulfilling prophecy, because as the stock plummets, confidence evaporates. And as another high-level Wall Street executive says, “No matter what the balance sheet says, if you can break confidence, the money is going to leave the institution.” Or as another person who knows Goldman well says about the firm’s models, “In an environment like that, the model doesn’t mean shit.”

There is evidence that as the stock price tumbled in fall 2008 the 30th floor of 85 Broad Street was not quite the haven of calm Goldman now suggests. By September 14, the weekend when Lehman went bankrupt, John Mack, of Morgan Stanley, and John Thain, by then the C.E.O. of Merrill Lynch, were urging the Securities and Exchange Commission to ban short-selling, in which investors bet that a stock is going to decline. Blankfein was opposed. After all, Goldman Sachs is a believer in the market, in which stocks should go down as well as up, and in its trading business, it regularly shorts securities of all kinds.

But that week, as the crisis escalated, Blankfein changed his mind. When Mack and Blankfein spoke on Tuesday, Blankfein said, “You’re right. We have to do something about this.” He then told S.E.C. chairman Christopher Cox, whose agency can use emergency powers to ban a lawful activity, that he was for the ban. “I’m for markets,” says Blankfein, who today describes the situation as “tricky.” “But when it felt like it had gotten abusive, when it was free money to short-sellers who were piling on, it felt less like the market and more like it was being manipulated.” He adds, “I crossed over.”

Managing partner Gustave “Gus” Levy in 1961.

“It was entirely a question of where you sit,” says one person familiar with events. “If you thought the wolf was at your door, then you were for the ban. If not, you had a principled view. It was a direct measure of how panicked the C.E.O. was at that moment about losing his firm.”

For all Goldman’s tough talk, when the market made a judgment on Goldman itself, the firm blinked. (It is possible that short-sellers were illegally manipulating the market, although no evidence of that has come to light.) “I would cop a plea to hypocrisy if you get rid of all the other charges,” says Blankfein.

The ban on short-selling, which went into effect on September 19, 2008, was a sign that the government was going to do what it had to do to protect the nation’s financial-services companies. But even that wasn’t enough to break the fear, and after a brief rebound Goldman’s stock began falling again. That Saturday, Tim O’Neill, a longtime Blankfein confidant who has held a variety of roles at the firm, called David Heller, a co-head of the global securities division, and said, “I think we built a house that can withstand a Cat 5 hurricane. It looks like a Cat 5 hurricane.”

But the storm never really hit, because that Sunday night, Goldman and Morgan Stanley issued press releases: With the blessing of the Federal Reserve, they were going to transform themselves into bank-holding companies. Because such banks are regulated by the Fed, there is a U.S.-government seal of approval that comes with the designation, and the fact that Morgan and Goldman were granted it so quickly (as Lehman had not been)—over a weekend—was a solid sign to the market that the United States would not let them fail.

And later, in October, after Buffett’s investment, Goldman took $10 billion more as part of tarp. Then, in the middle of the month, the Federal Deposit Insurance Corporation began a program under which banks could issue debt guaranteed by the federal government. Goldman eventually issued $28 billion of such debt, close to the limit of $35 billion the F.D.I.C. had set for it. As Goldman acknowledged in its public filings, the firm was “unable to raise significant amounts of long-term unsecured debt in the public markets, other than as a result of the issuance of securities guaranteed by the FDIC.”

Maybe it’s true that Goldman didn’t need the government’s help, but, nevertheless, the firm availed itself of all the help offered. What seems lost on Goldman executives is that questioning the necessity of that help from the safety of today’s vantage point smacks of trying to have your cake and eat it, too. And when they claim they would have done things differently had they anticipated the resulting criticism, it would be tempting to give them a taste of their own medicine: Goldman Sachs, you’re a smart, sophisticated investor—you did the trade! Now live with it.

In the wake of the crisis, one Goldman executive made the decision not to live with any of it anymore. In February 2009, Goldman announced the surprising departure of Jon Winkelried. Because he had put his Nantucket mansion on the market for $55 million and been allowed to cash out of a part of his interest in several Goldman Sachs–run funds for $19.7 million, there was widespread speculation that he was caught in a cash squeeze.

The explanation given by people close to Winkelried is, in some ways, more telling. Indeed, he had kept almost all of the money he had made in his 27-year career at Goldman in the firm’s stock or in its private-equity funds. As the crisis intensified, he wanted to raise cash, in case, “God forbid, something happened to Goldman,” as he confided to one friend. Because the terms of Buffett’s investment forbade Cohn, Winkelried, Viniar, and Blankfein from selling 90 percent of their holdings until three years after the deal, Goldman—in effect, in exchange for Winkelried’s helping to save the firm by agreeing to Buffett’s tough terms—allowed him to cash out of a part of the funds at a discount from their value at the time.

Bailing Out A.I.G.—or Goldman?

Inside Goldman, there is an overwhelming sense of pride in how the company weathered the crisis, and great admiration for Blankfein. “He is the right man at the right time,” says O’Neill.

And some clients have a new appreciation for Goldman: “When the shit was hitting the fan, Goldman acted very responsibly,” says one client, by which he means it didn’t try to prey on the weakness of other firms. Another client points out that while other firms stopped answering their phones at the height of the crisis, Goldman both dealt with its own problems and tried to help clients deal with theirs.

It’s possible that what many see as Goldman’s revisionist history wouldn’t cause so much rage if it weren’t for the taxpayer bailout of the giant insurer American International Group, which many see simply as a “backdoor bailout” of A.I.G.’s creditors, including Goldman Sachs, as Representative Darrell Issa, the ranking member of the Committee on Oversight and Government Reform, put it in a recent letter to the New York Federal Reserve. But the question goes beyond the money that changed hands.

The bare facts are these: Goldman bought what was effectively insurance from A.I.G. (in the form of credit-default swaps) on some $20 billion worth of slices of C.D.O.’s made up of mortgage securities. The deal was structured so that A.I.G. had to turn over cash in real time as the value of the securities deteriorated. By the summer of 2007, A.I.G. and Goldman had begun to fight bitterly about how much cash A.I.G. owed. Because there was a gap between what A.I.G. had paid and what Goldman thought it was owed, Goldman bought additional insurance from other Wall Street banks, which would pay off in the event that A.I.G. defaulted on its obligations.

Viniar shows me a piece of paper, which he calls his “Bible.” It lays out what all of this looked like on the Monday night before the federal government stepped in to take over A.I.G. At that point, the subprime securities had declined in value by $9.4 billion. Goldman had collected $7.5 billion in cash from A.I.G., and it had another $2.9 billion from the other Wall Street banks. Since Goldman had some small additional exposure to A.I.G., the net effect of this was that Goldman was “flat.”

Viniar was much mocked for telling analysts on a September 16, 2008, call that Goldman’s exposure to A.I.G. was “immaterial,” but under that narrow definition, it’s true. While you could argue about what would have happened if Goldman’s remaining $10 billion of A.I.G. securities had declined in value following an A.I.G. bankruptcy, the question probably would have been moot, because there may not have been a financial system at all.

After the government bailout of A.I.G., in order to end the collateral calls on the insurance giant, the New York Federal Reserve—whose chairman at the time was former Goldman chairman Steve Friedman—decided to purchase a slew of the securities that A.I.G. had insured, including $14 billion of those on which Goldman had purchased insurance. The government—meaning taxpayers—did so at full price, although according to a recent Bloomberg story, there had been negotiations with A.I.G. to do so at a 40 percent discount. Goldman says that the New York Fed broached the topic of a discount only once. The firm’s response: a flat no. While no one will ever know what would have happened had A.I.G. gone under, the essence of what did happen is perfectly clear. As a recent report by the Office of the Special Inspector General for TARP put it, the decision to pay full price “effectively transferred tens of billions of dollars of cash from the Government to A.I.G.’s counterparties.” Or to put it another way: because Goldman felt it was owed its billions by A.I.G., the firm took it from taxpayers instead.

The more interesting question may be the role that Goldman played in A.I.G.’s near destruction. Goldman says that it was largely an intermediary between A.I.G. and clients it won’t name. So when, after the government bailout and the Fed’s decision to pay full price, it received $8 billion from A.I.G., Goldman used that money, plus the billions in collateral it already held, to purchase A.I.G.-insured securities from their owners and deliver them to A.I.G., which had wanted to take them in exchange for canceling the insurance.

But outsiders say Goldman’s dealings with A.I.G. look more complicated than that. A memo written by Joseph Cassano, the former head of the A.I.G. financial-products division, shows that some of the securities Goldman insured with A.I.G. were created by none other than Goldman itself. Janet Tavakoli, a structured-finance expert who runs her own consulting firm in Chicago and wrote a book on C.D.O.’s in 2003, notes that Goldman’s deals also figure prominently in the list of C.D.O.’s upon which other firms bought insurance. Which is why, she says, “Goldman was responsible for huge systemic risk, and now they’re trying to pretend they weren’t.” Finally, on November 17, as criticism mounted, Blankfein issued a public apology: “We participated in things that were clearly wrong and have reason to regret.”

Wall Street Versus Main Street

An e-mail that made its way around Wall Street right after Goldman announced its third-quarter profits observed, “$17 Billion in comp Year-to-date 2009 vs. $11B during the same period of 2008—Not bad for a government sponsored entity!” The e-mail concluded, “Global economic Armageddon and the near imminent failure of the company was clearly the best thing that ever happened to [Goldman]!”

Goldman’s press releases about its spectacular earnings never mention government assistance of any kind. In June, the firm paid back the $10 billion in TARP funds it had taken. Taxpayers got a 23 percent return. As for the $21.6 billion in funds guaranteed by the F.D.I.C. that Goldman still has outstanding, a recent Congressional report estimates that it will save Goldman $2.4 billion over the life of the debt. But Cohn argues that that is actually costing the firm, in fees to the F.D.I.C. and interest, because it is excess liquidity. (When I repeat that to another Wall Streeter, he closes his eyes and says, “Please tell me Gary didn’t say that.”) Cohn also says that issuing the F.D.I.C. debt was “the single biggest mistake we made.”

In fairness, one of the reasons Goldman is making so much money is that, while its remaining competitors huddled in their bunkers, Goldman got back to work. “The Goldman Sachs team deserves great credit to go through what they went through and get back on their feet and make money,” says an observer.

But because so many of Goldman’s competitors were gone or disabled, spreads—the difference between the price at which you sell and buy a variety of securities—were wider than they had been in years, meaning that Goldman could practically mint money. By acting at the moment it did, with Lehman out and Merrill Lynch down for the count, the government enabled this situation. “The U.S. government unwittingly created an oligopoly in most markets, and, for Goldman, a near monopoly in some,” Scaramucci says. “They tied down Rockefeller and Gates, but they unwittingly unleashed Goldman!”

The other reason for Goldman’s profits is that the government has flooded the system with money, not just the money it used to rescue the financial system but hundreds of billions more in stimulus, in support of the housing market, and in the Federal Reserve’s purchases of securities. Analyst Meredith Whitney calls “government manipulation” the “strongest, most important theme of the capital markets in 2009.” You cannot fault Goldman for taking advantage of that, but it’s also true that, as National Economic Council director Larry Summers said, “there is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”

Ultimately, the big question is this: Do Goldman’s profits signify that good times are coming for the rest of the country? Jeff Verschleiser, a Goldman partner who joined the firm from Bear Stearns, says that, while Main Street may lag Wall Street, ultimately the outcomes will be “synched.” And Blankfein professes no doubt. “I’m charged with managing and preserving the franchise for the good of shareholders, and while I don’t want to sound highfalutin, it is also for the good of America,” he says. “I’m up-front about that. I think a strong Goldman Sachs is good for the country.”

When Goldman repaid the $10 billion in TARP funds, Blankfein wrote a very gracious letter to Representatives Barney Frank and Spencer Bachus. “Our return of the government’s investment does not, in any way, end our obligations to the public interest,” he wrote.

The problem is that there are few concrete signs that Goldman is acting in accordance with that patriotic letter. One place to look is the debate in Washington, D.C., over derivatives legislation. As it currently stands, the billions of dollars in profit in the derivatives business are basically controlled by the biggest dealers, including J. P. Morgan and Goldman. Critics say that those profits are protected by the opacity of the market, because no one can see the pricing. It’s as if your only source for the price of a share of IBM were whatever the dealer told you it was. Today, everyone, but everyone, advocates more transparency in the name of preventing the hidden tangle of risk that almost destroyed the financial system. As Blankfein says, transparency is “motherhood and apple pie.”

But the devil is in the details. In what one person describes as “hand-to-hand combat” in the dark alleys of D.C., Goldman and the other big dealers are seeking exemptions to some proposed new requirements that would help shine a big spotlight on derivatives trading—thereby hoping to keep the market murky. “Every time we go into a member of Congress’s office, they already have a Goldman Sachs white paper on this,” marvels another person who is active in Washington. The dealers, including Goldman, argue that they are trying to preserve their clients’ profits, not their own.

All in all, Goldman executives seem to be gambling that the current mood, in which the rest of us are rethinking the system that brought us to the very edge, and maybe into the depths, of a vast black pit, will blow over. And they may be right.

Meanwhile, to steal a line from Blankfein’s boss (Luke 12:48): From those who have been given much, much will be demanded.